Covid-19 had greatly affected the Indian economy. But now the situation is changing in the interest of the economy. The depressed economic parameters have started showings signs of improvement. The drivers of the economic slowdown preceding the pandemic appear to be reversing; for example, the credit crunch triggered by the failure of IL&FS in September 2018 had driven de-stocking across supply chains, hurting GDP. (As GDP measures activity, inventory build-up adds to it and conversely, inventory depletion lowers it). Now the end of this de-stocking is helping demand for manufacturing. Separately, the urban residential real-estate sector is also on the phase of recovery. The private demand has started picking up slowly and gradually.
However, it should be noted that the recovery is still weak and unbalanced calling for fiscal interventions amidst constraints in the government’s execution capacity. The State governments’ role also needs to be taken it account. The budget 2021 needs to take into account not only for the short term goals but also its long run implications.
With an expected 9% real growth in 2021-22 at the rate of 4% price hike, the economy is expected to grow at 13% nominal growth. Further the 15th Finance Commissions report is also expected to be tabled along with the Budget statement. This will determine the retention of the amount of the gross tax receipts by the Centre and the States respectively along with the allocations on important sectors such as defence, health and education.
The fiscal deficit is expected to be at 5.6% of GDP (against 3% in pre-pandemic) giving the government a liberal hand in her expenditure programs. There may be a revision of Debt to GDP as the current target of 60% appears unrealistic. Thus presuming a nominal growth @ 13% with the deficit ratio at 5.6%, government expenditure will grow at 18%. It should be remembered here that more than three-fourths of Central government spending is pre-committed — interest, salaries, pensions, subsidies, transfers to States, and other such heads. As these grow at their own steady pace, to achieve 18% growth in overall expenditure would mean nearly 150% growth in the non-committed heads.
The Income Tax slab may also be revised to boost the consumption demand. This may call for the recommendations of the Direct Tax Code committee as a timely reform.
The employment generating sectors such as real estate, infrastructure projects, which have started reviving, may be strengthened in the interest of unskilled and semi-skilled workers.
A very important provision is expected to come in the Health Sector mostly in the light of the weaknesses exposed by the pandemic. A budget for vaccination, supplementing primary healthcare capacity and improving its quality can help the country be better prepared for future epidemics. A speedy rollout of the National Digital Health Mission —with a national digital ID, registries for medical facilities, practitioners and medical records, etc. — can help. State governments too, need to boost their focus on capacity-building.
Furthermore, with the much required growth not only for alleviating poverty but also to keep debt-to-GDP ratios sustainable — and relatively high market expectations for the fiscal deficit ratio, new taxes and surcharges may not make any sense. A tenth of a percentage point change in the fiscal deficit ratio can add Rs 20,000 crore to expenditure.
Lack of capacity in the financial system is one of the structural problems in the Indian economy. If nominal GDP growth needs to be 12% a year for several years, growth in formal credit needs to be 14% to 15%. If public sector banks (PSBs), which are still a large part of the financial system, do not have the incentives to grow, the system cannot expand at that pace. The government can go for the privatisation of some PSBs, or separate ownership from management for all PSBs by creating a bank investment company. It can also create a well-capitalised Development Finance Institution (DFI) to support financing needs as the NIP is expanded.
With a rise in the volume of e-commerce, the government is expected to extend the facility of bulk clearance for e-commerce imports and exports with a view to promoting the growth of this fast-growing segment. This can greatly help in boosting the country’s outbound shipments. The government may also reduce the customs duties on several goods, including furniture raw materials, copper scrap, certain chemicals, telecom equipment and rubber products, to promote domestic manufacturing and exports.
It’s a high time the government needs to be pro-active in terms of her budgetary reforms. It has to restructure its asset ownership in its balance sheet by shifting away from mines, smelters, refineries, and too many financial firms, to providing better healthcare, education, urban infrastructure, defence, social security, and other such needs. A robust equity market provides a good opportunity to exit current holdings. The government must also re-evaluate its approach to disinvestment: an incessant trickle-feed of stocks in government companies instead of strategic sales have made them lag the overall market.
The post-Covid-19 Budget has to be a robust one, which can bring the economy on track of being the Leader in the years to come with internal stability of the economy in a most sustainable manner.
(The author is Associate
Professor in Economics)
